Why would an e-commerce firm settle for slow shipping?

The buzz in e-commerce has been all about speed. Firms from A to Z (or at least from Amazon to WalMart) have been trying to wring time from their distribution systems. Indeed, just yesterday Google announced it was expanding its Shopping Express same day delivery service. So what are we to make of Zulily, an e-tailer that routinely takes its sweet time to ship stuff?

For those unfamiliar with the firm, the Wall Street Journal describe it as a “mom-focused discount site” (Zulily Customers Play the Waiting Game, May 5). Like Gilt or Rue La La, Zulily operates on a private sales model with goods being offered at a discount for a limited times to members only. The interesting thing is that their suspect shipping times actually seem to be a conscious, strategic choice.

But Zulily’s Achilles’ heel may be shipping. Last year, it took an average of 11.5 days for items to be shipped from Zulily’s warehouses after customers ordered them. That doesn’t include the time it took for the goods to actually reach people’s homes.

The reason: Zulily doesn’t buy in advance most of the products it offers. Instead, it orders the items from vendors after the sales end. Vendors then ship the merchandise in bulk to one of two Zulily warehouses, where the products are sorted and combined with other orders before being shipped back out.

“It’s more efficient to do it this way,” Bob Spieth, Zulily’s chief operating officer, said in an interview, adding that the process also helps the company “control the customer experience.” It also doesn’t accept returns.

The “inventory-lite model” is why Zulily can afford to sell a wide range of discounted merchandise from more than 10,000 vendors, he said.

This is an intriguing model. Clearly not holding inventory is an attractive way to keep costs down and minimizing the risks of running the business. A fundamental point we emphasize in the core operations class is that business processes must be tailored to the firm’s strategic objectives. Zulily is aiming to be a low-cost provider and thus must tightly control a variety of expenses. One route to low-cost logistics is immense scale. Call that the Amazon model. That clearly will work if you have, well, scale. Even if it can greatly increase its user base, Zulily will likely never have the scale of a standard internet retailer since its business model is based on having a product assortment that is ever-changing. It is hard to keep customers engaged in flash sales if one is always carrying the same items.

Zulily’s model doesn’t depend on scale. Instead it depends on doing the minimal amount of work possible. It essentially does nothing on spec. If an item is moving through its distribution center, it is because someone has bought it. In contrast a conventional retailer would have to take a bunch of stuff that no one might demand for months (if ever).

But there have to be trade offs. As the article tells it, the trade off here is annoying customers. On at least some occasions, delivery times slip from days to weeks to months. Customers then get frustrated and cancel orders — or at least think twice before ordering again. The question then is how much of its savings on logistics does Zulily have to hand over to customers. Clearly, there will be customers who will gladly pay a few bucks more on a different site to get the goods predictably sooner. Zulily is effectively banking on bargain hunters who accept slow service in return for exceptional prices. Zulily’s model makes sense in serving those customers but at some point its sales may be capped by the inherent limits of its market.

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2 Responses

We have a very similar problem to Zulilly. We sell used forklifts to customers who typically find our products on our website. We keep an inventory but our machines require work like paint, new tires, and replacement parts before we ship them. We typically don’t do any of this work, however, until we receive an order. Then our customer has to wait a few weeks before we ship their machine. This helps us keep costs down and tailor our offering to each customer’s needs. But it prolongs our delivery time as well. Tough trade off.